Trump Overestimates His Negotiation Leverage in China Trade War

Donald Trump has said trade wars are “easy to win” – but he has a losing hand in the escalating trade war between the world’s two largest economies. He recently met with Chinese President Xi Jinping at the G-20 and negotiated a relative ceasefire in the U.S.’s effort to end to what many experts cite as China’s unfair trading practices.

Trump has bet that his public threat of ratcheting up tariffs from 10 to 25 percent after the first of the year (now on hold until March 1) and other highly aggressive negotiation tactics will fundamentally change China’s trade behavior. But Trump fails to understand several factors in this high-stakes poker game, as is obvious by his actions and statements.

One, Trump has overestimated the U.S.’s leverage power, appearing to believe that our conventional economic and military power translates directly to negotiation power. It does not.

True negotiation leverage is determined by each side’s alternative, or Plan B, if no deal is reached (Plan A would be any deal). We know this based on research going back to the 1981 classic negotiation book Getting to Yes by my Harvard Law School Professor Roger Fisher and Bill Ury. Here, the question becomes what will happen to the U.S. and China if no deal is reached (our respective Plan Bs).

The U.S.’s Plan B is not good. Many economic signals now point to the increasingly adverse impact of Trump’s trade war on U.S. consumers and businesses. In fact, the Paris-based Organization for Economic Cooperation and Development has forecast that a full trade war would cut the U.S.’s growth rate by half a percent in 2020 and cut global growth to near its slowest pace since the recent financial crisis.

Here’s the deal: the interconnected nature of international trade and the U.S. economy’s dependence on Chinese manufacturing mean that the U.S.’s leverage is not nearly as strong as Trump thinks.

Trump started complaining about unfair trade deficits in the 1980s. While trade with China has fundamentally changed since then, Trump’s thinking has not.

Our leverage will also get worse with each escalating round, as the tariff-imposed higher consumer prices materially impact a wider variety of goods and people. Trump has also threatened to increase tariffs on an additional $267 billion if China doesn’t back down, another leverage-weakening move.

“Wait,” Trump might respond. “Our economy is great. And our tariffs will disproportionately harm China (China’s Plan B), as China depends much more heavily on exports to the U.S. than we depend on exports to China. And this is already happening! Look at recent reports of China’s slowing growth. It’s already hurting them.”

This is true. But this analysis ignores Xi’s political leverage, a uniquely presidential negotiation element. In short, China’s authoritarian regime has the political will and power to withstand the economic harm caused by an extended trade war. Trump never dealt with anything similar in business.

Trump has even made Chinese intransigence more likely with his win-lose threat-based rhetoric, which invokes China’s national pride. China will now undoubtedly fight hard to avoid losing face, and is highly unlikely to cave under Trump-imposed public pressure.

By contrast, a democratic society based on the will of voters will exert extreme political pressure on Trump to make major concessions as soon as the economic harm hits home hard. This will likely happen before the 2020 presidential election. That would be a game-changer for Trump.

The second miscalculation Trump has made relates to his business history of short-term transactional negotiations, a history China has certainly studied. Trump’s rhetoric about taking the long-term view here flies in the face of his negotiation history for almost 50 years.

In fact, he has almost always taken the short-term sugar high in negotiations and has exhibited little patience to stick with long-term strategies.

A perfect example lies in his United States Football League (USFL) negotiations in the early 1980s, where he sought a USFL-NFL merger. Where his fellow owners had a long-term go slow and grow strategy, Trump forced them into a risky go-for-broke strategy that ended up with a lost multi-million TV contract and a failed antitrust lawsuit. The USFL crashed and burned as a result.

As Trump sees the economy taking a hit and his approval ratings decrease – expect him to make major concessions, ink a deal, and declare victory even if his losses outweigh his wins. This may have started already at the G-20 with the cease-fire, taking a lesson from the mid-terms that his trade war strategy partially led to the House Democratic gains.

Finally, Trump is capable of negotiation preparation and got some great results in his early business deals (New York City’s Commodore Hotel redevelopment, Trump Tower).

But he stopped doing his homework in the mid-1980s when became a celebrity. This predictably led to a bunch of bad negotiations and deals, including his overpaying by tens of millions for the Eastern Air Shuttle and Plaza Hotel.

Did Trump prepare much for his negotiations with Xi? No. AP Reporter Catherine Lucey said Trump told her and others that “he doesn’t need to prepare, because he knows the statistics and his gut has never been wrong.”

Unfortunately, the American people will likely pay for Trump’s lack of preparation.

Bottom line: the odds are not good for long-term success with Trump’s China trade war negotiation strategy. Not a smart bet.

* Marty Latz is the founder of Latz Negotiation, a national negotiation training, e-learning and consulting company, and has been studying and teaching negotiation for 25 years. He examined over 100 Trump negotiations from his almost 50 years in business for his new bookThe Real Trump Deal: An Eye-Opening Look at How He Really Negotiates.